Egypt is still struggling with its dollar shortage. It has sought to face the shortage through a series of decisions, the last of which entailed floating the exchange rate on Nov. 3. But the crisis persists, thus pushing Egypt to seek another currency that would reduce demand for the dollar. The choice has fallen on the Chinese yuan in the country’s battle against the dollar.

In a statement Dec. 6, the Egyptian Central Bank noted that the three-year agreement can be extended with the approval of both Chinese and Egyptian parties, adding that it is beneficial for both countries. The statement underlines the strong relations between Egypt and China and notes China’s support for Egypt’s economic reform program.

On Oct. 1, the Chinese yuan was added to the International Monetary Fund‘s (IMF) basket of currencies that make up the Special Drawing Right (SDR). The basket is used to calculate the average global exchange rate on a daily basis, which measures the value of the SDR of the 188 members that are participants in the SDR Department.

IMF Managing Director Christine Lagarde said in a statement Oct. 1, “Adding the Chinese yuan to the fund’s currency basket is a historical event, and this change reflects the continuous development of the global economy and the IMF’s willingness to keep up with this progress.”

Tunisia walked in the footsteps of Egypt and resorted to the yuan. On Dec. 13, the Central Bank of Tunisia announced that “Tunisia has agreed with China on the currency swap between the yuan and the Tunisian dinar in order to settle some of the trade operations and financial transactions between the two countries in the local currency.”

On Dec. 7, the deputy head of the Egyptian Association for Finance and Investment Studies, Mohsen Adel, said in a press statement, “The yuan’s inclusion in the IMF currency basket would allow an increase in Chinese investments in Egypt, following the currency swap agreement. Besides, the number of Chinese products in the Egyptian market is huge compared to that of other imported products.”

Commenting on the impact of the agreement, Adel said, “The agreement will help in attracting more Chinese tourists to Egypt, provided that Egypt enables more efficient mechanisms such as encouraging Egyptian products to compete with the Chinese ones to benefit from the decision.”

The data of the International Trade Point affiliated with the Ministry of Industry, Trade and Small Industries as well as the statistics of the Chinese Embassy in Cairo showed that the trade exchange between Egypt and China reached $12.25 billion in the past period.

Egyptian exports to China amount to roughly 9% of the total exchange activity between the two countries. On Jan. 21, the Chinese president announced a plan during his visit to Egypt to increase cooperation in investment, road construction and new factories.

The Egyptian government and the parliament support this agreement, as China had announced on Oct. 27 its participation in projects worth roughly $20 billion in the new administrative capital. On Oct. 1, the Suez Canal Authority also issued a decision to add the Chinese yuan to the approved currency basket to collect transit fees at the Suez Canal. The chairman of the Suez Canal Authority, Vice Adm. Mohab Mamish, said in a press statement Oct. 2, “This is a strong additional step that protects the revenues of the Suez Canal from dollar fluctuations, especially amid the global economy’s instability.”

Medhat El-Sherif, the undersecretary of the parliament’s Economic Committee, told Al-Monitor, “The agreement has more advantages than disadvantages because opting for the Chinese yuan will decrease the demand pressure on the dollar and the complete reliance on it in trade transactions. Consequently, the dollar price might drop as opposed to the Egyptian pound in the coming period.”

Sherif added, “The price of the yuan is expected to increase as opposed to the Egyptian pound, but not as much as the dollar increased in the past. Although the trade balance between Egypt and China is tending more to China in terms of exports, the accessibility to Chinese products is important. The state has issued several decisions to increase customs, but has not taken any measures to encourage the Egyptian product. Therefore, there will be a clear gap in the Egyptian market, and the Chinese product will try to bridge it due to its low price.”

Sherif added, “The agreement encourages Chinese traders to import from Egypt because they [can] trade in their own currency. As a result, their profits increase. Besides, the agreement encourages Chinese tourists to travel to Egypt because they can use their own currency there.”

China tops the list of exporting countries to Egypt, as per a report published by Youm7 on Jan. 20. Chinese imports accounted for about 11.4% of total imports in 2014, and imports from China increased during this period to 24.4%, valued at 59.57 billion Egyptian pounds, as opposed to 47.9 billion Egyptian pounds in 2013. Egypt’s exports to China include raw materials such as petroleum, natural gas, marble, granite, iron sand, iron ore and leather, while Cairo imports many Chinese products such as electronics, machinery, garments, spare parts and vehicles of all kinds, according to the Youm7 report.

Sherif said, “The economic committee held several meetings with representatives of the Central Bank to discuss the currency swap deal with China. Initially, the agreement involved the trade of 5 billion Chinese yuan, but the IMF’s decision to adopt the Chinese currency increased this value due to the easy transfer and trade of the yuan globally.”

Despite the statements of government officials and economic experts about the impact of the currency swap deal with China on the dollar value compared to the Egyptian pound, the deal is still restricted to words and is yet to be effectively implemented.

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